Barnes and Noble Looking to Sell, but to Whom?

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Barnes and Noble Looking to Sell, but to Whom?

The big bookstore news of the day is that Barnes and Noble is looking to sell themselves. Everyone is wondering who or what will be snatching up B&N, with rumors and speculation flying. Who are the likely and unlikely suitors? Here’s my take, from least likely to best fit.

Microsoft (or Apple, or some other pure technology company):
This is a completely insane idea. If B&N were solely looking to sell the ebook division, I could see Microsoft being a good fit. But why would Microsoft, or any pure tech company, be interested in buying 700+ retail bookstore locations? Putting aside the false notion that the only value left in B&N is in the ebook division, why would any company want the expense of dismantling the retail arm? It’s not as simple as just shutting everyone down. There’d be a huge severance cost for employees who were laid off, not to mention the expense of breaking leases and selling out all the book inventory. It’s just not realistic, and it would more than wipe out any value from the ebook division.

Besides, it’s still too early to sing a funeral dirge for paper books. PC World pointed out that in the same month that ebook sales, on the whole, outstripped hardcover ones, hardcovers still brought in over $200 million in sales, versus around $29.3 million for ebook sales. eBooks may be outselling hardcovers title for title, but there’s a much larger amount of hardcovers out there, especially when you factor in kids books (which typically don’t have as much of an ebook presence.) So while yes, over time ebooks are going to be a huge chunk of business, they aren’t worth abandoning the time-tested paper book model quite yet.

Finally, there’s one more reason why a tech company wouldn’t want to buy B&N and just jettison the paper business. One of the attractive things about Barnes and Noble is that they have an excellent and deep relationship with the publishing world. The same publishing world that HATES the concept of ebooks gaining too much power. What good is buying the ebook division and all those lucrative relationships with publishers if the answer is to turn around and give them a metaphorical raised finger?

Amazon or Borders merges/buys Barnes and Noble:
This is a bit more likely, but has its own set of issues. Amazon’s biggest stumbling block is taxes, since a physical presence in just about every state means they won’t be able to skip sales tax anymore. On the other hand, there are the aforementioned publisher relationships; being twice as big has it’s advantages when it comes to negotiating better prices.

Still, there’s the question of whether Amazon would want a physical presence; currently, their system of web-only is doing quite well for them, and there are some very practical expenses that come with owning a retail chain (like leases, electric bills, etc., which all contribute to tighter margins). And there’s the issue of the government getting concerned about anti-trust regulations. Amazon holds a large portion of the paper and ebook markets, and owning B&N would give them a nearly insurmountable majority hold. Whether it would hold up to scrutiny is debatable, and something that would be under considering if Amazon seriously pursued B&N.

Then there’s Borders. It wouldn’t solve all B&N’s problems since Borders certainly has debt and investor confidence issues of their own. On the other hand, consolidating against Target, Best Buy, and supermarkets all selling bestsellers, plus the continuing threat of Amazon and Apple, might give a combined company (Borders and Noble?) the overall customer base to hold their own.

Given the weakness in the bookstore market, I don’t necessarily think a Borders/B&N mashup would hit too many anti-trust roadblocks. It might still hit some, but the biggest issue hands down would be real estate. Borders and B&N tend to target the same markets, so if they merged they’re likely to have stores very close to one another. What do you do when the combined company has two stores within 2 miles? Shut one down? Take on the expenses of breaking leases, moving employees, etc? Or let them both run and split the customer base? Not to mention the expense of breaking Borders’ contracts with Kobo and Seattle’s Best (since B&N wouldn’t want to share ebook sales profits if they have a more lucrative in-house option, and the Starbucks/B&N partnership is a far stronger brand name). Even in-house remodels are extremely expensive and time-consuming, so merging the two companies stores and brands would take time B&N and Borders may not have.

Private Equity:
The Riggio Brothers have controlled Barnes and Noble for many years. Currently, they have what TheStreet.com called a “poison pill” that allows them to block an activist investor from taking more than 19% of the company without invoking certain shareholders rights. Why would two men who want that kind of control give it up to a third-party?

Most telling, The Street quotes Riggio as saying:

Barnes & Noble’s founder and biggest shareholder, Leonard Riggio, has also told the board he would consider being part of a wider investor group that could buy the company. “I fully support the Board’s decision to evaluate strategic alternatives at this time,” Riggio said in a statement. “Regardless of whether I participate in an investment group that buys the company, I, as well as the entire senior management team, am willing and eager to remain with the company and see it through the challenging years ahead.”

That sounds like someone who wants to keep his hands on the reigns, not give it up to another company. Taking the company private through a group of investors would potentially let Riggio remain in control, buffer B&N from constant market speculation, and give them the chance to better revamp the company in light of the new challenges it has faced with ebooks and slowing paper book sales.

What do you think B&N is planning? Do you have a company or buyer in mind for them? Share your thoughts below!

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About the Author

Zek
Zek has been a gadget fiend for a long time, going back to their first PDA (a Palm M100). They quickly went from researching what PDA to buy to following tech news closely and keeping up with the latest and greatest stuff. They love writing about ebooks because they combine their two favorite activities; reading anything and everything, and talking about fun new tech toys. What could be better?

7 Comments on "Barnes and Noble Looking to Sell, but to Whom?"

  1. One thing that occurred to me, Carly: Apple has a pretty solid balance sheet and market cap. *Plus* they’ve been getting more and more into the bricks-and-mortar business with their Apple stores. So one possibility that I can imagine is that Apple buys, merges with, or does some kind of sharing arrangement with B&N, whereby the B&N library of books is offered under iBooks, B&N brick-and-mortar stores offer some limited supply of Apple-related geegaws (iPods and iPod Touches, maybe?), and B&N has some kind of minor but prominent position in Apple stores. Apple could perhaps shut down some of the “redundant” stores, or merge them, or some such–B&N stores tend to be pretty large, whereas in my experience Apple stores are kinda small and, generally, ridiculously over-crowded. But there are quite a few places where this is both an Apple store and a B&N store in the same mall.

    If this were to happen, there would be no need for Apple to simply jettison the b$m stores, and while I’m sure some would close, it would not be nearly as many as a full-scale liquidation. Apple would acquire some valuable retail real estate and a *lot* of expertise in the book business, plus all B&Ns publishing contacts. And with *both* Jobs and B&N negotiating from the same side of the table, there is much more leverage to use Jobs’ famous RDF to get good eBook deals from publishers. Plus Apple gets a big library of available eBooks that are already in the correct format.

    I’m just blue-skying, sure, but I’m not as convinced as you seem to be that an Apple/B&N combo is unlikely.

  2. Joel McLaughlin | August 4, 2010 at 2:30 pm |

    I think Amazon would love to have them, but then I think there may be some governmental issues with that merger.

    For me, I see Walmart or someone who already sells dead tree books.

  3. I think you’re overestimating the value of B&N’s ebook offerings in relation to the brick and mortar stores. eBooks are big, but B&N runs 700+ brick and mortar stores PLUS another 600+ college bookstores. From a purely practical perspective, Apple would be buying into roughly 5-6x as many retail locations as they currently have (since Apple runs about 200 stores).

    So Apple’s buying into a narrow-margin, dying business model that needs a major revamp. That’s all assuming that Apple can even get a grasp on the book industry sufficiently to stabilize the deal. Given that Apple can’t even sign the country’s biggest publishing house (Random House), I don’t see Apple grasping how to run a bookstore terribly well. And if you don’t think you need “book people” to run a bookstore, just look at how well Borders CEOs have done; they had a grocery guy and a clothing guy and both of them only succeeded in wasting money on plans that didn’t sell books and further damaged the company.

    And B&N’s “big library of ebooks” is barely in the correct format. Aside from the underlying structure being ePUB, B&N and Apple use two very different DRM schemes, so there’s no benefit from combining them.

    Basically Apple would have to sink a ton of money and personnel into a turnaround with a high chance of failure, and I don’t see them being interested. IF it were just B&N.com or the nook properties, definitely. But 1300 retail locations? Not likely.

    Personally, and this is such a blue sky I didn’t even want to put it in the post itself, I could see a company like Target buying B&N. Then they could have B&N@Target in their stores. Benefit would be keeping shoppers in Target longer browsing books (and buying higher margin items like detergent and clothes), Target can afford the tighter margins that books have, and Target tends to skew towards a higher end feel (much like B&N).

  4. I definitely see your point about the number of stores, and it’s a good one, one I don’t have any answer for, honestly. You’re right: the only way they could do it would be to close a bunch of the stores completely.

    With regard to having “book people” run the business, I view that as a reason why Apple *would* consider it–they haven’t done so well at negotiating with the publishing houses, so they would partly being buying that expertise, as well as the B&N brand. Like I said: when it’s just Jobs negotiating, or just B&N negotiating, they only have so much pull. With both of them on the same side, that might give them an advantage. Just a thought.

    As far as the DRM stuff, from my perspective, that’s easy. If someone can download Calibre and a couple of python scripts and convert B&N books into iBooks in just a few minutes, it’s pretty easy for me to imagine that the B&N and iBook software boffins could get together in a couple of meetings and figure out a way to do it programmatically without very much trouble at all. I’ve seen eBooks converted from various formats into iBook format, and the best looking results that I’ve seen by far are when you go from B&N ePub to iBook ePub (since iTunes will suck in any non-DRM’d ebooks so long as they’re in the correct iTunes directory, and you tell iTunes where they are). Although PDF -> ePub looks pretty nice as well.

    So in sum, I think the DRM/conversion issue is a very minor issue that can be solved in software tout suite.

    Not that I think that Apple is going to do this; I’m just mulling here.

  5. But Doug, what does Apple get from buying B&N? Publishing contracts are great, but if Apple can’t manage it themselves then they need to go to the expense of hiring new people OR keeping on the same people leading a sinking ship. Or evaluate who is good and who isn’t, which is a very pricey option as well.

    I understand what you’re trying to say, but I just don’t see where there’s a monetary benefit to Apple. The minor boost their ebooks would get isn’t nearly worth tripling or quadrupling their retail rent obligations alone. Personally I’d rather see Apple use their cash to improve their existing product line than stretch signficantly outside their comfort zone for a hail mary pass on a dying retailer. What’s the benefit, an extra .05% boost to the bottom line? It just doesn’t fit, and I think shareholders would (rightfully) impale Steve Jobs and the entire board of Apple on a pike if they poured good money after bad like that.

  6. No, I think you’re right Carly, but I just can’t get an Apple option out of my mind. Maybe I need a drink. Or some therapy.

    But one answer is: yes, it’s a big hail mary but, as you say, it’s a dying business. So one would go into it knowing that the rental costs and employee payment costs and so forth would shrink over time. But you’re right in that it almost certainly wouldn’t fly.

    Of course, it seems to me that the same arguments you make about Apple hold with regard to your Target idea. What would Target do–close down all the stores that are within 10 miles of a Target, and just keep the ones that are isolated? And then why would *Target* want to buy a dying business? What does it buy them? Then *they* would be stuck with the costs of closing down all those stores and whatnot.

    But on the flip side, I absolutely can’t see someone buying *only* the eBook portion of the business. That would leave B&N with the dying portion, and what good is that?

    So I guess that leaves me floating helplessly out in space . . .

  7. David Morrow II | August 4, 2010 at 10:28 pm |

    Barnes and Noble Looking to Sell, But to Whom? | Gear Diary: … up with the latest and greatest stuff. She loves … http://bit.ly/a2Q7kp

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